© 2005 Mark T. Schenkel1 Mark T. Schenkel, PhD Belmont University Navigating the Challenges of New Venture Growth Foundations of Entrepreneurship

© 2005 Mark T. Schenkel2 Today’s Agenda Questions on your Entry Strategy Reports... ? Others... ? Main Topic: Navigating the Challenges of New Venture Growth

© 2005 Mark T. Schenkel3 Courage: Risk and the Dimensions of Work Life Cycle of a Business Venture Pre - launch Start - up Growth Tr ansition Exit/Succession

© 2005 Mark T. Schenkel4 The Importance of Knowledge “Entrepreneur and organizational knowledge leads to opportunities” Assumes that the entrepreneur and the firm have knowledge about the existing product and the existing market Implies different combinations of different levels of these types of knowledge create different growth strategies

© 2005 Mark T. Schenkel5 Growth Strategies Penetration Product Development Market Development Diversification Market Product Existing New New Existing

© 2005 Mark T. Schenkel6 Strategies  Penetration- Growth By Selling More Of Existing Product To Existing Customers  Market Development  New Geographic Market  New Demographic Market  New Product Use  Product Development- Sell New Products To Existing Customers  Diversification- Sell New Product To New Market

© 2005 Mark T. Schenkel7 Value-Added Chain Analysis Raw Materials Producer Raw Materials Wholesaler Manufacturer Finished Goods Wholesaler Retailer Customer Forward Integration Backward Integration Horizontal Integration

© 2005 Mark T. Schenkel8 Growth Categories Unused Potential Actual Growth Little Potential Constrained Professional Management Growth Aspirations High Low Yes No

© 2005 Mark T. Schenkel9 Seven Challenges of Growth The growth myth Vision drift Cultural drift Resource crises Systems crises Muddled structure Disjointed strategies

© 2005 Mark T. Schenkel10 Ten Drivers for Successful Growth 1. Vision and Culture 2. Planning for the “Right” Growth 3. Financial Tools for Navigation 4. Rationale Structure 5. Effective Communication 6. Building the Team 7. Effective Staffing 8. Marketing Strategy for the Market 9. Exit/Succession Planning 10. Leadership

© 2005 Mark T. Schenkel11 Key Takeaway Points... Different types (i.e., entrepreneur, organizational), combinations and levels of knowledge create different growth strategies. As a firm gets bigger it begins to benefit from the advantages of size. However, as the firm grows, it changes, introducing a number of managerial challenges.

© 2005 Mark T. Schenkel12 Key Takeaway Points... To overcome pressures on existing resources, the entrepreneur could acquire new resources, or reduce the need for new resources required through better management of existing resources. Firm growth introduces a number of managerial challenges for the entrepreneur: ability, focus, and willingness to take firm to new heights.

© 2005 Mark T. Schenkel13 EXIT PLANNING Mark T. Schenkel, Ph.D.

© 2005 Mark T. Schenkel14 Exit Planning The process of preparing for the transition of both the entrepreneur and the business

© 2005 Mark T. Schenkel15 Exit Through Ownership Transfer Type of ExitAdvantagesDisadvantages Asset SaleCash saleImmediate tax on full sale Clean breakLower face value sale price Earn-out possibleSometimes difficult to locate a willing and able buyer Stock SaleHigher face value of sale price Potential volatility of stock from sale Tax deferment of sale price Restrictions on sale of stock

© 2005 Mark T. Schenkel16 Sale Process of a Business Initial Inquiry Letter of Intent Deal Price and Basic Structure Agreed Upon Purchase Agreement and Closing Due Diligence ~ 10 % of deals proceed to next stage ~ 50 % of deals proceed to next stage

© 2005 Mark T. Schenkel17 Exit Through Partial or Limited Transfer Type of ExitAdvantagesDisadvantages MergerPotential synergiesCultures may clash Tax deferment of sale price Limited opportunity for immediate cash IPOTaking some cash out possible Limits on sale of stock Can bring in professional management

© 2005 Mark T. Schenkel18 Exit Through Partial or Limited Transfer Type of ExitAdvantagesDisadvantages Strategic AllianceReduces risk to existing value May be long time, if at all, to actual exit ESOPCan maintain business culture May be long time, if at all, to actual exit *Management Buyout Maintain business culture + faster and cleaner than ESOP Immediate tax on full sale Family Business Transfer Can maintain business culture Challenges of generational succession

© 2005 Mark T. Schenkel19 Exit Through Bankruptcy Type of ExitAdvantagesDisadvantages BankruptcyOrderly end to business Ethical challenges Results in no realization of wealth for entrepreneur from the business Can hurt entrepreneur’s ability to fund future deals

© 2005 Mark T. Schenkel20 Exit Through Liquidation Type of ExitAdvantagesDisadvantages LiquidationMay result in more value, especially for service business No value for going concern Can be viewed as “failure”

© 2005 Mark T. Schenkel21 Exit Planning 1. Re-examine owners’ aspirations 2. Evaluate timing issues 3. Consider ethical issues of exit plans 4. Set specific financial goals, and the timeframe to achieve these goals, based on owners’ aspirations related to wealth 5. Establish a specific plan to meet financial goals 6. Begin external audit or review 7. Evaluate possible exit options

© 2005 Mark T. Schenkel22 Looking Ahead... Thursday (11/30) Start up Analysis Paper Due Start up Analysis Paper Lessons 3 Minute Reports Tuesday (12/5) Start up Analysis Paper Lessons 3 Minute Reports Final Exam Period ETP : Thursday 12/7 – 8a Interview Acknowledgement Form Due Final Reflections Essay ETP : Monday 12/11 – 11a Interview Acknowledgement Form Due Final Reflections Essay